The Small Investor And His Greed
Greed is the reason they have lost money in finance companies not only in CRB Capital Markets but dozens of other finance companies many South-based finance companies have recently gone under and not been able to repay their depositors because investments in real estate and gold havent appreciated the way they were expected to.
These same punters have also lost money in the capital market after a major flirtation with the primary market in the late 80s and the early 90s when they expected their shares bought at par to give them returns in excess of 400-500 per cent. So they barged in on the advise of brokers and other so-called experts into the primary market regardless of the nature of projects, the promoters or even the price. And they got burnt.
Yet, they never seem to learn from their follies of the past. There are more waiting to get hurt when teak plantations turn out to be little more than a vegetable patch and the post-dated interest cheques bounce higher than the new tennis balls in the French Open tournament.
All these losers have one thing in common: greed. Whether it is fixed deposits, equity issues or some other investment, small investors have been looking to get rich overnight. And in pursuing these high returns, they have totally forgotten or perhaps never learnt how to evaluate risk. Someone should tell them that there is such a thing as a risk return equation.
Greed makes these depositors unable to look beyond the 16 per cent interest on a one-year deposit along with the 10 per cent incentive in cash. Do these people not ask the question that how the hell is a company, whose cost of fund is almost 30 per cent, be able to find an asset which not only yields in excess of 30 per cent but is also safe? One can understand if somebody decides to punt on such high risk, high-return investments with small sums. But putting your entire life savings or provident fund in a company which is into risky lines of business is daft, to say the least.
But what do these small and not-so-small depositors and investors do? They start blaming everybody other than themselves for having flushed their savings down the chute. Along the way they collect a motley bunch of politicians looking for media mileage and carrying a grouse that it wasnt a firm of his cronies which managed to get rich at the expense of the very people he is trying to get justice for.
Even if we take for granted that the process of information dissemination among smaller investors is not excellent, especially in the non-metros, and that credit rating agencies are not all that they are cracked up to be, even with these imperfections it is ridiculous for such depositors to assume that only regulatory authorities are responsible for the collapse of such firms.
Surely an investor who is able to save a lakh of rupees has some brains and intellect to question such blatant tactics to raise money. Or are these investors really naive enough to believe that when banks are not paying more than 10-11 per cent and other solid companies like HDFC are paying 14-15 per cent, that a great philanthropist in the form of Chain Roop Bhansali, the messiah from Marwar, is coming to shower them with money.
Investor forums and consumer education groups, instead of blaming the RBI, Sebi or any other body they can think of, should start educating investors about risk. Maybe a national association of investors, like the one that exists in the United States, should be set up. Such a body could educate investors about risk-return equations and explain the risks involved in different types of activities to depositors and investors through regional and local groups. This, in turn, could help investors understand why some companies offer such high rates of returns and the risks entailed in investing in such firms.
Perhaps, these efforts could be supplemented by a publication in which the apex investors association not only provides information about the activities of deposit-raising companies but also makes qualitative judgements about the asset portfolios and lines of business.
This process of investor education is very important if such scams are to appear less frequently in the future. Making depositors aware of the risks and explaining the differences in the yield of different instruments may go some way to help avoid a recurrence of such savings disasters. Of course, the regulators and credit rating agencies have to tighten up their act, but it is investor education and focus on risk that will have the most long-term impact. Once investors are fully aware of the risks involved in getting high returns, they may discover, like Gekko, that sometimes, greed is not good.